China joins the global central bank loosening club

China became the latest central bank to loosen monetary policy when it cuts its Reserve Requirement Ratio (RRR) by 0.5% earlier today. The RRR is now 19.5%. A cut to the RRR is roughly equivalent to an interest rate cut; it means that banks have to hold fewer reserves, which boosts their ability to lend. When banks have more money to lend, then interest rates tend to fall.

The PBOC had been conspicuous by its absence in recent weeks as a wave of major central banks embarked on looser monetary programmes including the ECB, Bank of Canada, Switzerland and Denmark to name just a few.

Growth in focus

The writing seemed to be on the wall when China’s manufacturing PMI for January dipped back into contraction territory at 49. the lowest level since September 2012. This followed another spate of weak data including 2014 GDP, which came in at 7.3%; the lowest level since 2009, added to this CPI remains depressed at 1.5%. If China wants to boost growth for the rest of the year, the PBOC had to play catch up by loosening monetary policy sooner rather than later.

More to come from Beijing?

Capital Economics estimate that today’s 0.5% move injects approx. $96bn into the Chinese economy. To put that in perspective, China’s economy is worth $10 trillion, so today’s RRR cut is a drop in the ocean. In typical PBOC style, it has dipped its toe into the policy loosening world, which leaves the door firmly open for them to take further steps in the future if needed.

RRR: China’s preferred policy tool, for now

Today’s move suggests that the PBOC may use the RRR as its preferred policy tool in the coming weeks and months. Even after today’s cut the RRR is still a hefty 19.5%, so there is room for further cuts. Interest rates in China are 5.6%, the 1-year benchmark lending rate, which was last cut in November. We think that the scope to cut 1-year lending rates is fairly low, as we close to the lowest ever level at 5.3%, last reached in 2010.

The Chinese currency question:

The CNY could be another reason why the authorities in China decided to take action to cut the RRR today. The Morgan Stanley trade weighted CNY index made a record high on 30th Jan, which could add to the pressure on China’s exporters. The CNY is also at a record high vs. the EUR, which could also worry the authorities.

For now, the Chinese authorities seem happy to stick to its de-facto peg to the dollar, however, with the USD expected to continue appreciating, it is uncertain how happy the Chinese authorities will be with a strengthening currency at the same time as the economy has hit the skids. While we don’t expect any radical action like a re-valuation of the CNY exchange rate any time soon, if the RRR cut does not boost the economy in the coming months then it could be a policy option for Beijing later this year.

The FX impact:

In the G10 space the Aussie tends to be the biggest beneficiary from PBOC loosening actions due to the strong trade links between Australia and China. After initially bouncing on the news to a high of 0.7850, AUDUSD has retreated.

This doesn’t disrupt the prevailing trend in AUDUSD, which is looking for a bullish reversal in the short term. As long as we stay above 0.7626 – the 3rd Feb low, then we could see further upside. In the short term, key resistance lies at 0.7907 – the high from 29th Jan, and then 0.8054 – the high from 23rd Jan. In the long-term there is no sign of this downtrend coming to an end unless we break above 0.8067. Overall, we expect the upside to be limited as the RBA remains in easing mode.

Latest Forex Market Reviews

December 9, 2016Gold is tired of moving in the range
On the daily chart of gold, the bears remain control over the market. As long as quotes are below $ 1,195, their positions are not under threat. The update of the December low can lead to the continuation of downward movement towards $1,116...
December 9, 2016Oil prices ignored bigger-than expected drop
After an Asian consolidation oil prices moved higher on Thursday. The price slightly grew and reversed the minor part of its losses. The benchmark approached 53.50 post-Europe open. The price stayed below the 50 and 100 EMAs in the 1 hour chart...
December 9, 2016EURUSD Trades Below Significant Resistance
The Italian referendum weighed on EUR/USD, fell to a year low of 1.0506 on 5th December. It was followed a quick recovery, as a result of the rebound of the Euro after testing the significant support level at 1.0500. Yet it retraced after testing the significant resistance level at 1.0800...

The usage of this website constitutes acceptance of the following legal information. Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.